Out of the Frying Pan, Into the Market: Americans Pulling Money Out of Banks

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By Jeff Cox

American bank accounts have gotten noticeably smaller this year as mom-and-pop investors have begun to embrace risk.

Deposit balances in insured banks have fallen by $51 billion-a small amount relatively speaking, to be sure, but notable in that it reverses a six-year pattern, according to Market Rates Insight.

The drop in deposit balances poses a vexing problem to banks, which are under regulatory pressure to cut leverage and increase their percentage of cash on hand.

"The overall decline in deposits balances in the second quarter of 2013 is an indication that interest rates on deposits are likely to start climbing up in the near future" Dan Geller, executive vice president at Market Rates Insight, said in a statement.

"Financial institutions will need to start increasing interest rates on deposits in order to maintain current deposits levels and to increase liquidity ratio as mandated by Basel III," he added, referring to the international guidelines for bank capital requirements.

But the surge in balances over the past six years had been completely counter-intuitive from a return standpoint, in that deposit rates tumbled from 3.28 percent in July 2007 all the way down to 0.28 percent.
From the early stages of the financial crisis in mid-2007, deposit balances increased some 40 percent, from $6.7 trillion to $9.4 trillion.

That trend had come, though, as jittery investors yanked money from riskier mutual funds and poured their savings into plain-vanilla checking and savings accounts as well as money market funds.
And money markets continue to attract cash.

After seeing net redemptions in the first quarter, money markets drew $50 billion, or 1.1 percent of total assets, in the second quarter, Market Rates Insight said.

The year has featured an overall change in where retail investors have moved money.

Bond mutual funds have seen dramatic outflows, with the biggest beneficiary nondomestic mutual funds-European equity funds have taken in $12 billion over just the last two months-and blended funds that offer exposure to stocks and bonds.

U.S.-based funds, meanwhile, have been only modest beneficiaries of what some experts predicted would be a "Great Rotation" from bonds to stocks.

If the trend out of deposit accounts continues, it could pose a further dilemma for the Federal Reserve, which has been repressing interest rates in hopes of stimulating economic development and investor risk-taking.

Rates have surged since the central bank began indicating that it likely will curtail its $85 billion a month bond-buying program.

While the Fed itself has not raised its targeted policy rate, the market has pushed yields higher on its own, and could continue to do so if banks have to raise deposit rates.

That would make its hopes to begin pulling back on quantitative easing more complicated, and pose a whole new set of dynamics for financial markets.

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betty_brock

Banks don't pay enough interest. That is why. You may as well spend the money. Even credit unions don't pay much. We took ours out and bought a car.

September 12 2013 at 8:40 PM Report abuse rate up rate down Reply
Nancy

Keep your stupid, for-profit banks. I've no use for them. I've always been a member of credit unions and always will be.

September 04 2013 at 9:40 AM Report abuse rate up rate down Reply
brennemanbelkin

My bank pays .25% which sounds terrible until it's juxtaposed to the mutual fund I"ve bought into.
Six grand, fifteen years ago has grown to thirty five hundred.

September 04 2013 at 8:40 AM Report abuse rate up rate down Reply
itooso

Banks pay almost nothing in regular savings and checking accounts, they are making a lot of money on those accounts. People have lost their faith in Stocks, they might do well but then they might go down faster than a rollercoaster.

September 04 2013 at 8:25 AM Report abuse rate up rate down Reply
frank1946

Credit Unions are simply a better deal.

September 04 2013 at 7:02 AM Report abuse +2 rate up rate down Reply
Stephen

You could bury your money in your back yard..and draw more interest than you could having it in most banks.

September 03 2013 at 11:50 PM Report abuse +2 rate up rate down Reply
1 reply to Stephen's comment
cyretired

Better than that. I had a small saving account at a CU and since I didn't but money in it for over 6 months they started charging a fee. By the time I found out they had taken more than half my money.

September 04 2013 at 12:22 AM Report abuse -2 rate up rate down Reply
Sue

Mankind has lost all control. We THINK we're in control, but we're not. Just look at our money. We're petrified we're gonna lose it because many have. Because we're not in control, we're afraid someone else will make a bad decision and we'll be left out in the cold. This is a sad place we're in as a nation. Esp for America. I too am contemplating getting a fail safe safe, and put it all in there and live out of that for a while. All I hear around me is how the markets/banks/investments etc are gonna crash soon. WHY would I want to support such a corrupt organization like the Financial industry??? They sure as heck haven't helped us. Just keep raising the taxes, printing more money, and risking OUR money.

September 03 2013 at 11:21 PM Report abuse rate up rate down Reply
chemconst

I have found that Credit Unions are an excellent place to park your money when taking it out from Banks. They work for you and the community, with no fat big wig CEO's drawing millions of dollars in bonuses for themselves. From fees, to loans, to interest rates paid, you cannot go wron by moving your money froma Bank to a Credit Union.

Harris Glasser
"It's My Money & I Want It!"
www.Harris Helps.org

September 03 2013 at 11:02 PM Report abuse +3 rate up rate down Reply
MARILYN J. MAHAN

Hi, my bank only gives me 1% on my checking account, I don't have a savings, because I never trusted banks, they only take your money, but with a checking it's a little different, although the interest is really bad! Marilyn in FL!

September 03 2013 at 10:33 PM Report abuse +1 rate up rate down Reply
jhrooney

The banks have paid almost no interest while making record profits. From the sound of this article the banks will have to start competing for capital. That means higher rates, probably on three to five year cd's.

September 03 2013 at 10:20 PM Report abuse +2 rate up rate down Reply